Lloyds Banking Group is planning an overhaul of the chief executive’s bonus
scheme that will only see him receive an award once the taxpayer’s
investment in the bank returns to the black.

The new pay deal would mean Antonio Horta-Osorio could not draw his 2012 bonus until Lloyds’ shares hit a level where the state was back in profit on its bail-out investment. The Government paid £20bn for a 41pc stake in the bank in 2008.

Sources at the bank confirmed the remuneration committee was considering the proposal for Mr Horta-Osorio, who has been chief executive since early 2011.

He is eligible for an award of more than £2m, on top of his £1.06m salary, but no decision has yet been made on how much he will be granted. To claim the bonus, he would have to wait until the shares rose above a set price and remained there for a sustained period. Like all Lloyds bonuses, it would then be deferred for three years and subject to clawback.

The taxpayer bought Lloyds shares at 73.6p but Lloyds has made payments that bring the equivalent entry price down to 64p. The remuneration committee, which meets at the end of the month, is also weighing up which share price to use as the bonus trigger. If adopted, a similar deal could be used for a new pay package for 2013 and beyond. Lloyds shares closed yesterday at 50.6p.

The arrangement is being considered to align the chief executive with the taxpayer and to defuse a potential row over the payment.

Details emerged as Mr Horta Osorio and Lloyds chairman Sir Win Bischoff appeared before the Parliamentary Commission on Banking Standards. Sir Win said bonuses for 2012 “will be the lowest undoubtedly of any bank”. He said: “We are very conscious of the point... that as a taxpayer-owned company we should, perhaps more than others, be very much aware of the public sentiment in relation to that and we will be.”

Mr Horta Osorio added that, on pay, Lloyds is “very mindful of the general environment in the financial services sector”.

The bank revealed it has hired more than 5,000 specialist compliance staff to handle customer complaints over the payment protection insurance (PPI) mis-selling scandal. Lloyds has set aside just over £5bn to compensate customers, the largest sum in the industry – reflecting its dominant share of the mortgage and personal loan market.

He said he supported the industry’s calls to put a time limit on customers to make a PPI claim, adding that “it would address the huge cost of compliance”.

He also indicated that the bank may increase the provision it has taken against interest rate swap mis-selling to small businesses. Mr Horta Osorio said the bank had set aside £90m, but that it was now reviewing all 40,000 swaps it sold in light of the financial watchdog’s new guidance given that “the scope is bigger” now than originally.

Sir Win added: “We will announce [at the full year results] whether the provision should be increased.”

Mr Horta Osorio also set himself against his banking colleagues by backing the Chancellor’s plan to give regulators the powers to break up banks that are not complying with ring-fencing rules. He said he had not been notified about the British Bankers' Association’s comments in protest at the move, adding: “I do support electrification.

“If we think that for society as a whole it is important to have ringfencing, both from a financial stability point of view and from a cultural point of view, I absolutely agree it should have strong enforcement and strong incentives in order for this to happen.”